Adobe (NASDAQ:ADBE) and Intuit (NASDAQ:INTU) could not be more different. While the former creates multimedia and creativity software appealing to artists, the latter is involved in the business of financial software fit for tax experts and accountants. Yet they are similar in many ways – financially strong software companies with more than 20% operating margins, consistent revenue growth, and sufficient cash on the balance sheet. In addition, both could see double-digit growth this year despite the Covid-19 pandemic. Does that sound like a good investment opportunity? But which one would you choose? Our assessment is that even though Adobe is trading at a similar multiple as Intuit, it may still turn out to be a better choice for investors given its growth and profitability characteristics. Our dashboard Creative Adobe Vs Analytical Intuit: Investors’ Choice gives further insights into historical performance of these two companies, and arguments around why Adobe may be a better investment.
When we look at any investment opportunity – return is a key consideration apart from risk. Return is a function of buy price, sell price, and time duration. Let’s look at the buy price first. Currently, Adobe is trading at a P/E of 57 vs 58 for Intuit. Fascinating to see two very different software companies being priced similarly by investors – testament to how underlying financials are trending in the context of broader market chaos. The crux is that you will pay roughly the same for each dollar of earnings for each of the companies. So far, so good. But we need to dig deeper and look at profitability and growth to identify pricing inefficiency.
Adobe’s net margin for the last 3 years averaged 26% vs 21% for Intuit. Slight advantage to Adobe since you’ll be paying the same amount to buy in to a more profitable company. But that’s not all. Net margins can fluctuate because of non-operational reasons. So why not look at operating margins? The story is same here – 31% for Adobe vs 27% for Intuit over the last 3 years (average). So are you really getting a slightly better deal with Adobe? Not so fast. We haven’t even considered growth yet and therein lies the twist. Adobe’s average annual revenue growth between 2015 and 2019 was 24% vs 14% for Intuit – a massive difference.
So overall, for the same price, you get higher growth and a more profitable company in Adobe. At some point, the market is likely to price in this growth difference and normalize prices.
Want out-performance? Try guessing the % returns for our Pershing-inspired portfolio – based on billionaire Bill Ackman’s firm Pershing Square – vs. the S&P over the last 1 week, 1 month, 3 months, YTD or even 3 years. Our portfolio combines high growth, quality, and risk mitigation criteria in an interesting way.